New loans increased considerably in May to 793 billion RMB, up from 682 billion RMB in April, beating expectations of 700 billion RMB for the month. Most of the lending reportedly took place in the last week of the month, as both loan extension and deposit growth at the major banks had been weak throughout the first three weeks of May.

The resumption of credit growth should support economic activity in the short-term, with a likely rebound in growth coming in the third quarter. However, easing credit conditions present significant risks in the medium-term, potentially working against the structural rebalancing of the economy, re-stoking the real estate bubble, deteriorating banks’ asset quality and encouraging potentially wasteful investment.

Inflation eased in May to 3.0 percent y-o-y, down from 3.4 percent in April. The drop offers mixed signals about the economy’s prospects. It highlights the slowing activity, particularly in domestic demand, but also indicates that the government no longer needs to worry as much about price pressures picking back up soon, thus alleviating at least one challenge to accelerating stimulative measures for the economy.

Exports fared better than expected in May with y-o-y growth rebounding to 15.3 percent from 4.9 percent in April. Export growth for the year-to-date is now up to 8.7 percent from last year. Encouragingly, the export increase was relatively broad-based. Still, this month’s export performance should be read with caution, as it may not mark a trend going forward, particularly as weakness in Europe is likely to persist and the United States looks set to slow somewhat further. Imports expanded by 12.7 percent y-o-y in May, up from a moribund 0.4 percent in April. Shipments of raw materials were particularly strong.

Growth in industrial production ticked up in May to 9.6 percent y-o-y from 9.3 percent in April. While the slight increase in the sector’s expansion is certainly welcome, growth for industry in China remains weak. Meanwhile, retail sales of consumer goods grew at 13.8 percent y-o-y, down from April’s 14.1 percent. The sluggishness in both retails sales and industry indicate that final domestic demand remains comparatively weak, even as investment has begun to pick up.

Fixed asset investment bounced back relatively quickly in May. While the year-to-date increase in FAI fell to 20.1 percent y-o-y from 20.2 percent in April, this change translated into a sequential increase and a y-o-y growth rate of about 19 percent for May alone.

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